On October 30, 2008, the Centers for Medicare & Medicaid Services (CMS) released the 2009 Medicare physician fee schedule rule (Final 2009 PFS).1 The Final 2009 PFS will be published in the November 19, 2008 Federal Register, and most provisions will become effective on January 1, 2009.

Within the Final 2009 PFS provisions, CMS has substantially amended Medicare’s antimarkup rule for diagnostic tests acquired by physicians from outside sources. For a number of years, CMS has struggled to come up with a revised formulation of the antimarkup rule that would preserve the legitimate provision of in-office diagnostic services, while also cutting back on the proliferation of arrangements that have allowed physicians to profit from the diagnostic work of pathologists, radiologists and other specialists. As with two earlier rulemaking efforts that were subsequently withdrawn or delayed, however, the revised anti-markup provisions in the PFS final rule raise serious questions regarding whether CMS has successfully struck the right balance.

At the same time, CMS declined to finalize a proposed exception to the federal physician self-referral (Stark) law that would have expressly permitted certain arrangements with hospitals that either pay physicians for their role in reducing overall procedure costs (i.e., “incentive payment” programs, such as pay-for-performance) or that allow physicians to share in the cost savings attributed to their efforts (i.e., “shared savings programs,” such as gainsharing). This exception arguably is needed to ensure that such programs do not run afoul of the self-referral restrictions of the Stark law. Rather than finalize its proposal, however, CMS is providing an additional 90-day comment period and has requested additional input from the industry on a number of topics relevant to such an exception.

This Update provides a summary of the anti-markup provision and CMS’s request for additional comments.

Anti-Markup Provision

As a check on overutilization and inflated charges, the Medicare anti-markup rule historically has prohibited physicians from acquiring diagnostic tests from an outside supplier and then marking-up the cost of those services in their charges to the Medicare program. However, because the anti-markup rule has not applied to professional interpretations or to tests performed within an ordering physician’s practice, physicians have been able to largely avoid the rule’s restrictions through a variety of arrangements that essentially involve pathologists, radiologists, or other diagnostic specialists supervising and performing diagnostic testing on behalf of ordering physicians, typically on a part-time basis and often at locations removed from the ordering physician’s regular patient care offices.

As these arrangements grew in number over the past decade and contributed to rapid growth in Medicare expenditures for high cost pathology and imaging services, CMS began looking for ways to amend the anti-markup rule to prevent ordering physicians from profiting from diagnostic services that, in the Agency’s view, really were being performed by others.

After considering a number of options, the 2008 PFS rule contained a revised antimarkup provision that would have applied to both the professional component (PC) and technical component (TC) of diagnostic tests not performed “in the office” of the billing physician. Confusion over what was meant by the billing physician’s office, however, led CMS to delay implementation of that rule for diagnostic tests other than certain anatomic pathology services, and to revisit the issue in this year’s rulemaking cycle.

The end result is a new two-step approach to the Medicare anti-markup rule for diagnostic tests other than services billable under the clinical laboratory fee schedule, which are subject to a separate direct billing requirement. Beginning January 1, 2009, these diagnostic tests are to be examined under the anti-markup rule first to determine whether the performing or supervising physician performs “substantially all” — meaning at least 75 percent — of his or her professional services for the billing physician or other supplier. If the performing/supervising physician can meet the “substantially all” standard, then diagnostic tests furnished by that physician on behalf of the billing physician or other supplier are not subject to the anti-markup provisions.

If a diagnostic test is performed or supervised by a physician who does not meet the “substantially all” standard, then, on a test-by-test basis, it is to be examined under a modified “site-of-service” standard. The modified site-of-service standard looks to determine whether the TC or PC is conducted or supervised in the office of the billing physician or other supplier. Under this standard, a physician performing or supervising a diagnostic test “shares a practice” with the billing physician if the testing is performed in the “same building” in which the ordering physician regularly furnishes patient care services. “Same building” is defined as a structure or combination of structures that share a single street address. CMS also clarified that a billing physician may have more than one “office of the billing physician.” If a test performed or supervised by a physician does not meet the “substantially all” standard, but can nevertheless meet the “site-of-service” standard, then the tests billed are not subject to the anti-markup provisions.

Noticeably absent from the revised anti-markup rule are any restrictions on billing for diagnostic tests that do not need to be performed or supervised by a physician, such as the TC of many anatomic pathology services. In a surprise development not hinted at in the proposed rule, CMS indicates that if the TC of a diagnostic test does not require physician supervision under the Medicare payment rules, the revised anti-markup provisions are not applicable. No rationale is given for this significant departure from the Medicare policy otherwise reflected in the rule, which for that reason seems likely to generate significant controversy, especially among pathology laboratory interests that have been advocating for higher, rather than more permissive, anti-markup restrictions.

Incentive Payment and Shared Savings Programs

In the Final 2009 PFS, CMS concedes that it has “had limited opportunity to review incentive payment and shared savings programs for compliance with the physician selfreferral law, and [it] lacked familiarity with the specifics of measuring achievements and calculating payments under such programs.” Therefore, having received, in its assessment, an insufficient number of comments regarding how to effectively implement the proposed exception, and due to a lack of agreement among those who did comment, CMS chose to seek additional information through a new 90-day comment period.

In order to ensure that it receives the information it needs to finalize a new Stark exception, CMS has set forth 55 specific topics for which it is specifically soliciting public comment, with the goal of creating an exception, or exceptions, for incentive payment and shared shavings programs at hospitals that will “achieve transparency and accountability, ensure quality of care, and prevent disguised payments for referrals.” In particular, CMS seeks comments on topics such as:

  • What safeguards would protect against the risk of program or patient abuse? Among other questions, CMS asks how an exception could be crafted so as to satisfy the requirements of the Civil Monetary Penalties section of the Social Security Act (§ 1877(b)(4)) that prohibits payments to a physician for reducing or limiting items or services furnished to beneficiaries. 
  • How to ensure that programs are supported by objective medical evidence. For example, if and how independent medical reviews or other mechanisms should be used to protect against payments based on sham measures or measures that do not reflect objective quality outcomes. 
  • Who may participate in the programs? For example, must participating physicians be on the medical staff of the sponsoring hospital at the start of the program? 
  • How may payments be distributed? For example, may payments be distributed on other than a per capita basis, should there be caps on payments or on the cost savings eligible for distribution to physicians, and should payments based on previously achieved cost savings or meeting standard-of-care quality measures be disallowed? 
  • How should the sharing of global savings be addressed? Specifically, what safeguards would be necessary if a new exception permitted the sharing of department or service line cost savings that did not involve individually-targeted and measured performance measures?

Although CMS noted that it believes that “properly structured arrangements involving physician participation in an incentive payment or shared savings program may meet the requirements of one or more of the existing physician self-referral exceptions for compensation arrangements,” the detailed request for additional information suggests that it remains committed to developing a stand-alone exception. Moreover, although CMS deferred responding to comments already received concerning the proposed exception, it did note its disagreement with the suggestion that CMS must or should delay the issuance of a final exception until the completion of the “gainsharing demonstrations” that were authorized by the Deficit Reduction Act of 2005.